When Chicago teachers began their strike on Monday, critics rightly pointed out that the city already pays one of the highest average teacher salaries in the nation. Even more important, however, is the generous retirement package received by Chicago public school teachers.
A Chicago teacher who retired in 2011 after 30 or more years of service time could expect an annual pension payment of $77,496. For context, the average Social Security benefit—which requires a much higher employee contribution into the system—would likely be in the range of $25,000 to $30,000 per year for a worker with a similar salary history.
Another way to think about the Chicago teacher pension system is to examine the employer’s “normal cost,” meaning the cost of additional benefits that accrue each year to current teachers. In 2011, the risk-adjusted normal cost was 46 percent of wages. (See technical note below.*)
In other words, for every dollar of salary paid to Chicago teachers, the city also incurred a cost of 46 cents for the future pension benefits they accrued in 2011. By contrast, the employer cost of a typical 401(k) plan in the private sector is about 4 percent of wages.
Chicago teachers also enjoy a benefit that is rare in the private sector—retiree health coverage, which allows teachers who retire (often in their 50s) to maintain their health insurance until Medicare kicks in at 65. Accrued retiree health benefits for current teachers cost the city another 5 percent of salaries last year, meaning an additional five cents for every dollar paid in salary.
With retirement benefits that easily outstrip benefits provided to similar workers in the private sector, Chicago teachers going on strike to demand even higher compensation from taxpayers is just not defensible.
*Technical note: The risk-adjusted normal cost of pensions comes from converting the published normal cost of 14.32 percent of wages discounted at 8.0 percent to the normal cost discounted at the prevailing risk-free interest rate in July 2011, which was 3.67 percent. The employee contribution of roughly 2 percent of wages was then subtracted from the total. For an explanation of these calculations in gory detail, see “The Real Cost of Public Pensions.”